Strong growth prospects drive Divi's Laboratories earnings upgrades

Ongoing capacity additions, market share gains, and new launches are key triggers

The Divi’s Laboratories stock hit its all-time high on Monday after brokerages revised their earnings estimates on a better-than-expected March quarter performance and strong outlook.
 
The second-largest pharma company by market capitalisation posted 29 per cent growth in revenues, led by gains in the nutraceuticals segment, which was up 88 per cent over the year-ago period. The custom synthesis and generic active pharmaceutical ingredient segments were up 24-26 per cent.
 
A better product mix with higher growth in the carotenoids and custom synthesis segments helped it expand gross margin by 460 basis points YoY to 67.5 per cent. The operating profit margin, too, came in at a robust 40 per cent, up 810 basis points on the back of falling employee costs and lower other expenses.
 
While the March quarter results were strong, the Street believes there are still multiple profit triggers for the stock. Analysts at Motilal Oswal Research believe that new product development, ongoing capex, and strong prospects in the custom synthesis segment offer confidence that the momentum in earnings growth will sustain over the next two-three years.

 
The company has 16 products under development, with the formulations market size of $10 billion; these are expected to go off patent by FY23-25. With clearance for the Kakinada project in Andhra Pradesh and ongoing expansion, the company is well placed to tap growth opportunities, including the shift away from China, as well as gain market share from competitors.
 
Analysts at Kotak Institutional Equities expect strong market share gains and the introduction of new active pharmaceutical ingredients to drive 16 per cent annual sales growth in the generics segment over FY21-23. In the custom synthesis segment, the company indicated that commercial shipments for monupiravir, an anti-viral used in the treatment of influenza, have started and this should boost near term growth.
 
While analysts expect the company to deliver high teens earnings growth over the next three years on the back of market share gains, new products and capacity expansion, the valuation at 32x its FY23 earnings estimates is on the higher side. Investors can look at the stock on dips.